Is STMicroelectronics a Threat to InvenSense's Growing Business?

Last week, STMicroelectronics (NYSE: STM  ) unveiled a new 2-axis gyroscope designed for optical image stabilization, or OIS. The new design is still larger in volume than InvenSense's (NYSE: INVN  ) IDG-2030, but puts pressure on its pricing. The smaller chip increases ST's design win opportunities in Google (NASDAQ: GOOGL  ) Android smartphones and wearable devices, but InvenSense is still a step ahead.

Your smartphone camera is getting better
As people increasingly use their smartphones as their primary camera, some smartphone manufacturers looking to differentiate themselves have focused on improving the camera. Samsung caters to the smartphone shutterbug with its Galaxy Zoom. Nokia released a smartphone with a 41-megapixel camera last year. There's clearly a growing demand for better cameras in smartphones.

One solution to improving smartphone cameras has been InvenSense's OIS chips, which were previously the only chips small enough to practically use in a smartphone design. OIS uses a gyroscope to correct for shaky hands and awkward camera interfaces on smartphones where a user must tap the screen to take a picture. As a result, the image is clearer and smartphone owners have magically improved their photography skills.

A growing part of InvenSense's business
InvenSense enjoyed a head start in OIS in smartphones, but ST has quickly caught up as the technology catches on with manufacturers. It's still early in the game, and there's plenty of room for both companies to grow their OIS businesses, but it has been a fast growing part of InvenSense's business.

Although OIS is still accounted for in InvenSense's "other" category, the company has noted that it's growing quickly. In the first quarter fiscal 2014 conference call, InvenSense CFO Alan Krock indicated that OIS accounted for about half the revenue from the "other" category. That means InvenSense sold about $5.6 million worth of OIS chips. In the second quarter call, CEO Behrooz Abdi noted that 2-axis OIS volume ramps increased substantially, as the other segments made up 14% of the record $70.8 million in quarterly revenue.

The new design from ST might slow down the growth in InvenSense's business as it puts pricing pressure on the company. InvenSense is no stranger to pricing pressure, however, and expects prices on its products to decline 20% to 25% annually. As volume ramps up it will be easier for InvenSense to compete on pricing.

InvenSense's biggest advantage
Despite ST's newest product coming available, InvenSense still has a strong advantage over its biggest competitor. The company has developed a strong relationship with Google and its Android ecosystem over the last couple years. In fact, InvenSense sensors are essentially plug-and-play for Android, so OEMs are willing to pay a bit more for the ease of use.

The relationship with Google is only getting stronger as the company's chips are found in Google's Nexus 5 and Google Glass. As Android leads the way in wearable devices, InvenSense has a good chance of maintaining its position in the OIS market.

Abdi mentioned on the first quarter conference call that the company's integration with Android on a software level is beneficial to its position, especially with less mature manufacturers (like in China). He thinks less mature manufacturers "are going to be very receptive to just getting the total solution ... that's well integrated from ... an Android ecosystem." I'm inclined to agree.

ST lacks this important relationship with Google and its Android software, but maintains a strong relationship with the biggest Android device manufacturer -- Samsung. At the same time, however, InvenSense has an equal share of Samsung's MEMS business, and expects to continue gaining share.

The big picture
The long-term picture on OIS is ironically unclear. InvenSense certainly leads the way, but there's plenty of opportunity for both InvenSense and STMicroelectronics. The latest design from ST is only a small threat to InvenSense and will put pressure on it pricing, but that's nothing new for the company. As InvenSense transitions its customers to new products and ramps up volume, margins should remain stable.

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